Asian Cities - 1H 2023

S P OT L I G H T
Savills Research

Japan Data Centres

Japan Data Centres

Data centres benefit from boom incloud services
GRAPH 1: Japan Digital Transformation Implementation, 2021 vs 2022
Company-wide
DX implementation

DX implementation in
specific departments

Department-level discretionfor DX implementation

No DX implementation

Digital business related
since inception

Unsure2021

2022

0%20%40%60%80%

100%

Source Ministry of Economy, Trade and Industry DX White Paper 2023, Savills Research & Consultancy

GRAPH 2: Forecasted Data Centre Services Market Value by Service, 2023 vs 2027
HostingHousingCommon use

Iaas/PaaS
Communications circuiting services
Other (SaaS, etc)

5,000
4,500

DIGITAL TRANSFORMATION IN
JAPANThe pandemic has expedited demand for
digital infrastructure in Japan, which hasserved as a catalyst for economic growthand investment, with foreign direct
investment into communications having
seen significant increments over the past
few years to more than JPY300 billion in2022. Since the government started its
focus on semiconductor policies in 2021,
investments of more than JPY2 trillion havebeen announced.
Indeed, the need for digital security hasheightened, especially amidst international
disputes like those observed between theUnited States and China. Greater interestin the semiconductor industry has risen inturn, and TSMC will be constructing a JPY1
trillion fabrication plant to be completed
in 2024 in Kumamoto. Furthermore,
chipmaker Rapidus, led by the former CEOsof Tokyo Electron and Western Digital
Japan, is planning to begin full-scale
2-nanometer production in 2027. Overall,this paradigm shift has signified increasing
demand for data centres to serve as a basefor digital infrastructure.

4,000

JPY BILLION

3,500
3,000
2,5002,000
1,500
1,00050002023

2027
Source Fuji Chimera Research Institute, Savills Research & Consultancy

GRAPH 3: Forecasted Number of Data Centre Racks in Japan, 2023 vs 2027
Operational Racks

Non-operational Racks

NO. OF DATA CENTRE RACKS

300,000

250,000

200,000

150,000

100,000

50,000

02023

2027

Source Fuji Chimera Research Institute, Savills Research & Consultancy
savills.co.jp/insight-and-opinion/

2GROWTH OF DATA CENTRES IN
JAPANThe rise of digital transformation has also
served as a tailwind to the rapid expansion
seen in the data centre sector, withsignificant growth forecasted in upcomingyears. A survey conducted by the Ministryof Economy, Trade and Industry, showed
an increasing number of companies thathave made digital transformation initiatives
from 2021 and 2022 (Graph 1). Moreover,according to Fuji Chimera ResearchInstitute, the market value of data centres
is expected to have expanded from around
JPY2.1 trillion in 2018 to JPY3.7 trillion
in 2023, and is forecast to grow to JPY4.4
trillion in 2027. In physical terms, thenumber of server racks is expected to double
from around 138,000 in 2023 to 272,000 in2027, underscoring the extent of the marketexpansion in Japan.
Around a decade ago, the market wasdominated primarily by domestic IT
companies such as NTT and NEC. However,many international competitors havesince made significant advances into themarket, which is also where most of theupcoming growth lies. For instance, GLP
has reportedly secured more than half of theland and power supply in its plan to invest
up to JPY1.5 trillion to build 900MW of dataJapan Data Centres

centres in Japan – approximately equivalent
to the current stock in the market as of2022. Many other data centre operatorsand developers, including Equinix and Colt
DCS, have also made notable advances in
the market and have announced plans tocontinue expanding.
HYPERSCALE VS LOCAL DATACENTRES
Hyperscale data centres are typically owned
and operated by major corporations, andoften have more than 5,000 servers withcapacities upward of 20MW. In Japan,
many such data centres are located on theoutskirts of major urban areas such as inInzai, Chiba, and situated in clusters dueto the large amount of land and energy
required for operational use. On the otherhand, local data centres are much smaller inscale by comparison, and tend to be locatedin closer proximity to central business
districts. However, many older local data
centres tend to house outdated, companytailored IT systems that have become
more difficult to maintain. The Japanese
government’s digital transformation pushhas resulted in companies moving awayfrom these legacy enterprise systems, andmigrating to cloud-based solutions that
hyperscale data centres provide.
Nonetheless, there is still the need and thedemand for local data centres situated closer
to central areas. Firstly, some companies
like to maintain their IT systems in a
hybrid fashion, using both cloud services
provided by hyperscale data centres, as well
as some form of in-house storage, which

The data centre market is forecast
for augmented growth over the next
few years, with multiple hyperscale
projects in the pipeline. At the sametime, local data centres are alsoseeing strong interest from users
and investors as an entry point into
the burgeoning market.

could be either in-office or colocation space.
Colocation data centres close to central areas
have an advantage here as they can provide
customers relatively easier physical accesscompared to those situated further afield.
INVESTMENT TRENDS
While the announcements of multiple
hyperscale data centre projects havestolen much of the spotlight in the data
centre market, local data centres in central
business districts have also gained sometraction.
Indeed the conversion of office buildings
to local colocation data centres appears to be

GRAPH 4: Digital Transformation by Location
Implementing since 2018
Implementing since 2020
No plans to implement

Implementing since 2019
Has plans to implement

Tokyo 23W

Cities designated bygovernment ordinanceCore Cities

Other Cities, Towns, Villages

0%20%40%60%80%

100%

Source Ministry of Economy, Trade and Industry DX White Paper 2023, Savills Research & Consultancy

3a viable strategy, considering that leases fordata centres will be longer and can generally
generate greater net operating income thana similar office building would, due to thespecialised nature and scarcity of suchproperties.
One notable example would be theGotenyama building located in Shinagawa,Tokyo, which Sekisui House REIT decided tosell to TIS for JPY70 billion in March 2023 atan appraised direct cap rate of 3.3%. While it
is officially designated as an office building,the buyer TIS is leasing the building in
its entirety, using it as a data centre as ofMarch 2023. In addition, Hulic and Digital
Edge are reportedly developing a data
centre in Nihonbashi, which is likely to havebeen redeveloped from an office building.
International investors have also been active,
with Gaw Capital acquiring two buildings
in Fuchu, Tokyo, which is a well-establisheddata centre cluster close to the Tokyo 23W.
Gaw Capital has plans to develop them intoa data centre facility with a power capacityof 50MW. Indeed, investors looking to invest
in the Japanese data centre market will more
likely find opportunities in similar local
data centres, as compared to the hyperscale
market which is much more competitive.
OUTLOOK
The data centre market in Japan is rapidly
growing and expected to see considerable
growth in the coming years, with multiple
large hyperscale developments in thepipeline, particularly in the Greater Tokyoand Greater Osaka area. While the market
has the potential to grow even beyond
that, there are multiple constraints thatwill likely hinder this, especially in thecase of hyperscale data centres. Firstly,Japan Data Centres

GRAPH 5: Communications Foreign Direct Investment in Japan by Year, 2014 to 2022
400300200

JPY BILLION

1000-100-200-300-400-500
2014

2015

2016

2017

2018

2019

2020

2021

2022

Source Bank of Japan, Savills Research & Consultancy

land suitable for data centre development
is scarce as there are various constraints
pertaining to size and location. Next, theavailability of power is another significant
obstacle to overcome, as obtaining power
can take years to secure.
Going forward, more investors are likely
paying closer attention to the local data
centre market, which is comparatively easier
to break into. In addition, looking at Graph4, many companies located outside of theTokyo 23W have been notably slower in digitaltransformation, suggesting that there could
be potential latent demand in the future if
these companies are able to catch up on digitaltransformation. Foreign direct investment indigital infrastructure and communications
technology is likely to continue expanding as
seen in Graph 5. Overall, both the hyperscaleand local data centre markets will likely seeconsiderable growth.

For more information about this report, please contact us
Savills JapanSavills Research

Christian ManciniCEO, Asia Pacific(Ex. Greater China)+81 3 6777 5150
cmancini@savills.co.jp

Tetsuya Kaneko
Managing Director, Head ofResearch & Consultancy, Japan+81 3 6777 5192
tkaneko@savills.co.jp

Simon Smith
Regional Head of Research& Consultancy, Asia Pacific+852 2842 4573
ssmith@savills.com.hk

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